Dec 8, 2008 - Microstructure theories provide an answer to the question of why secu- ... Two well-known approaches analyzing the asymmetric ... For instance, a random fall in stock price can attract value inves- ... larity (decimal) of quotations. .... However, if we assume that we can neglect moments higher than the.
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Price Volatility in the Context of Market Microstructure Peter Lerner and Chunchi Wu * Contents 3.1 Introduction 3.2 Heuristic Explanation of the Effect of Frictions on Volatility 3.3 Participation of Informed Traders and Spreads 3.4 Market Volatility in the Context of Informed Trading Theory 3.5 Simulated Model for the Time Evolution of Prices 3.6 Empirical Evidence of Volatility Dependence on the Tick Size 3.7 Conclusion References
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3.1 Introduction Microstructure theories provide an answer to the question of why security prices change in the absence of new information announcements and why they can differ from the volatility of the underlying asset even for the 100% equity firm. Two well-known approaches analyzing the asymmetric information trading problem are Kyle (1985) and Glosten and Milgrom (1985), which are dissimilar in mathematical formalism, yet provide similar answers to this question.
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We thank discussants and chairs Irv Morgan, J. Randolph Norsworthy (RPI), Elin Tully, and Brian Lucey (Dublin) for valuable suggestions, Mark Miller (Syracuse University) and Natasha Trofimenko (Kiel) for the help with statistics, and Kathy Yuan (University of Michigan) for the emerging market database. All errors are our own.
